New Paradigm In Supply Chain Management

Today, the need for integrated, global supply chain management is largely unquestioned. It is accepted, for example, that supply chain leaders usually work more effectively with external business partners. They also tend to design, build, move, store, sell and service their products with greater speed and economy. Now, more than ever, supply chains are regarded as sources of business value.

1. The Foundations of Competitive Advantage:  Supply chain management hasn't always been a corporate priority. In fact, supply chains used to be viewed largely as cost centres: loose confederations of functions that companies had to have to manage materials and serve customers. When senior executives did turn their attention to the supply chain, it often was to cut costs from existing operations, rather than to explore opportunities for competitive advantage and differentiation.
However, innovative companies, such as Dell, Nokia, Seven-Eleven Japan, Wal-Mart, consistently outperformed their competitors—both financially and in customer satisfaction. For these companies, it became evident that supply chain management was among their most powerful weapons.
2. Questions Remain: Although the importance of supply chain management is broadly acknowledged, few senior executives are sure about how and where to direct their supply chain investments to maximize business results. This is a critical disconnect.
Opportunities for supply chain enhancement are everywhere, but specific information about strategic value often is absent. In other words, executives want—and need—to know what supply chain programs will affect their companies' performance in the most substantive way, and what paths they should take to manage the complexity and challenges that accompany supply chain initiatives. They also need more and better information about what it means to be a supply chain leader, what advantages are associated with supply chain leadership, and what supply chain leaders actually do to ensure or extend their competitive advantage.
3. Winning Supply Chain Strategies: Every company has its own supply chain affinities and emphasis points. However, the interviews and surveys conducted by the research show that virtually all winning business strategies have competitively advantaged supply chain strategies at their core.
For example, Nokia's frequent and rapid product introductions— major contributors to fast revenue and profit growth are supported by a very flexible and efficient global supply chain. In effect, Nokia has altered the playing field with rapid- response manufacturing, quick-ship logistics, and a “global supply web” that links Nokia suppliers and plants, and also supports vendor- managed inventory (VMI) and collaborative planning. These capabilities have contributed to 20 percent margins, a 35 percent market share, and an average cost to make and sell phones that is 18 percent lower than its rivals.
Another company the research team studied is Zara, a global clothing manufacturer/retailer
 
whose supply chain strategy is to dictate industry standards for time to market, costs, order fulfillment and customer satisfaction. Zara owns almost all of its 450 retail stores; its managers send customer feedback directly to the company's in-house designers via handheld


devices. This keeps designers instantly abreast of fast-changing trends and demands, and gives Zara a jump on curtailing the sale of less-desirable merchandise. The result in both cases is better-managed inventories, tight linkages between demand and supply, and reduced obsolescence costs. Zara also acquires fabrics in only four colors and postpones dyeing and printing until close to manufacture, thus reducing waste and minimizing the need to clear unsold inventories.

4. Competitively Advantaged Supply Chain Strategies Are at the Core of Most Winning Business Strategies: Strategies designed to significantly alter the competitive playing field Nokia can quickly adapt to fast-changing consumer cell phone preferences using innovative design, supply, production and logistics strategies. Strategies that focus on setting industry standards for time to market, costs, order fulfillment and customer satisfaction Zara employs creative sourcing and postponement strategies to beat rivals to market by months with new fashion products.
Strategies that include performance-driven linkages to external supplier/customer partners to ensure maximum connectivity and information sharing Taiwan Semiconductor Manufacturing Co. (TSMC), one of the world's largest semiconductor foundries, uses customer-responsive design and Web-based manufacturing collaboration tools to connect with customers from product concept to delivery.

Many supply chain leaders adopt an integrated operating model to successfully balance supply and demand across internal operations and with supply chain partners. With these supply chain innovations, Zara can deliver new styles in three to six weeks, compared to up to five months for competitors. It also helps explain why Zara has experienced 20 percent sales growth for more than a decade, along with consistent, industry-leading 10 percent profit margins.

A third supply chain strategy emphasizes performance-driven linkages to suppliers and customers. The research team noted that Taiwan Semiconductor Manufacturing Co. (TSMC) has extensive, Web-enabled linkages with suppliers (demand forecasts, production requirements and logistics data are available 24/7) and customers (many of which have electronic access to key TSMC design, planning and logistics tools). These connections have helped TSMC achieve the semiconductor industry’s shortest manufacturing-cycle times from design to final product. TSMC also enjoys some of the industry's highest yields and highest levels of customer satisfaction.

5. Supporting Winning Supply Chain Strategies with Integrated Operating Models:
Most companies focus on defining high-level business strategies. But they don't spend enough time designing an integrated operating model before implementing detailed processes and capabilities to execute the strategy.
An integrated operating model often is the key to successfully balancing supply and demand across internal operations and with supply chain partners. Although they vary significantly by industry, integrated operating models always incorporate world-class business processes—particularly customer relations, supplier management, new product design and core logistical operations. They also tend to be the product of a management culture that encourages supply chain excellence and insists that its people understand and flawlessly execute supply chain processes.

Out of the box: These companies developed an industry-redefining operating model as a core component of their initial overall strategies. Dell, for example, pioneered the direct-to-customer supply chain model for personal computers, bypassing traditional, higher-cost distributor/ retail channels and enabling consumers to customize their purchases and deliveries. The company also excels at adjusting prices in response to supply/demand conditions.

Later in life: These companies transformed to an integrated operating model as their executives recognized the opportunity to enhance competitive advantage.  Seven-Eleven Japan moved to eight store deliveries per day when it realized that custom assortments of key products that are oriented to time-of-day shopping could enhance revenues and profits.

Focused transformation: To leapfrog the competition, these companies adopted an integrated operating model in a specific part of their business. General Electric and Home Depot worked together to develop a “buy one/make-and-ship one” model for home appliances. This approach minimizes inventory in retail stores and distribution channels, while providing consumers with more product options, customized deliveries and post-sale services.

6. Leading Supply Chain Companies Build Innovation into Their Operating Models, Particularly with Respect to Outsourcing, Internal/External Integration, and Matching Supply and Demand: Innovation is an important term that is often made meaningless by overuse or inappropriate use. However, most of the world's top companies understand that the basis of competitive differentiation is new—that is, innovative—ways to improve operating performance. Identified three distinct capabilities that foster or reflect innovation and supply chain leadership:

• Matching supply and demand
• Next-generation efficiency gains
• Organizational integration

Supply chain leaders' core operating principle and most critical supply chain process is balancing market needs with available supply. Researchers identified several best practices associated with this capability, including ultrahigh-frequency deliveries (as practiced by Seven-Eleven Japan) and dynamic pricing coupled with customized assembly (as practiced by Dell).

Collaborative forecasting and inventory management is another important demonstration of supply/demand matching. Consider the collaborative planning, forecasting and replenishment (CPFR) 1 initiative undertaken by Henkel (a multinational manufacturer of consumer and industrial products), Condis (a Spanish supermarket chain) and several packaging suppliers. This group established a CPFR process for laundry and home care products that involves daily data interchange for key items, coordinated business planning (e.g., combined promotions and collaborative forecasts) and jointly defined and measured key performance indicators (KPIs).
CPFR is a registered trademark of the VIC (Voluntary Inter industry Commerce Standards) organization.

8. Rethinking Supply Chain Relationships and Integrating Technology Can Result in Next-Generation Efficiency Gains:
I)         Outsourcing Key Supply Chain Activities:
By outsourcing non-core activities, Thames Water (the world’s third-largest water company) quickly reduced costs and improved service levels in a regulated environment. Inventory levels dropped 50 percent and material availability now exceeds 99 percent.
II)       Technology-Enabled, Global Procurement Management:
PolyOne, the world's largest polymer service company, created an integrated, end-to-end network to reduce inventory within the supply chain and improve customer service.
III)    Vertically Integrated and Owned Supply Chains:
Esquel, a Far East apparel supplier, ensures quality by owning up-channel material sources, including cotton farms. Control over supply helps it provide unique product solutions; maintain consistent, corporate wide, supply chain metrics; and attain significantly higher margins than competitors.

9. By Inserting RFID Tags Into Razor Packages, Gillette Can Now Track Razors and Blades from Point-of-Manufacture to Point-of-Sale:

I)    Next-Generation Efficiency Gains: To minimize operating costs and employed assets, supply chain leaders are more likely than most to consider and implement leading edge operating strategies and technologies. Some of the top food companies, for example, have implemented collaborative transportation-management approaches, while innovative retailers such as Staples and Wal-Mart combine cross-docking and advanced warehouse management to raise the bar in distribution. The research team identified numerous examples of next-generation efficiency gains:

• Redefining Procurement with Advanced Supplier Relationships and Technologies, such as e-Markets and Electronic (reverse) Auctions: A hold Netherlands sources highly perishable products directly from farmers, thus ensuring better quality and on-shelf availability through multiyear deals. A hold also works to cement its relationships by agreeing to buy all production offered and, in some circumstances, guaranteeing farmers' income even if crops fail.

• Applying Selective Approaches to Outsourcing: When it comes to outsourcing and collaboration, supply chain leaders think outside the box. As shown in Research Note 3, this may involve seemingly opposing approaches. Thames Water achieved world-class efficiency by outsourcing select supply chain activities. But decision makers at Esquel concluded that the only way to ensure maximum-quality cotton and yarn supply was to own key upstream processes. In effect, “selective” means making an informed choice about whether to actually engage in an activity: to outsource or not to outsource.

• Partnering for Collaborative Benefit: Radio frequency identification (RFID) tags are being attached to Gillette products that are shipped to Tesco stores. These tags enable both companies to track inventories down to the item level, thus reducing channel volume and enhancing forecasting and planning capabilities. In addition, Gillette now can track razors and blades from point-of-manufacture to point-of-sale, and Tesco can restock shelves and replenish inventory with greater speed and efficiency.
In another example of innovative partnering, Coca-Cola now markets and distributes Groupe  Danone bottled water in the United States, using a shared-assets strategy to reduce costs. Danone contributes brand and manufacturing sites, while Coca-Cola provides marketing and distribution expertise. Already, the arrangement has increased both sides volume and margin potential, while reducing supply chain costs through additional product efficiencies.

II)    Organizational Integration: Supply chain leaders align internal and external organizations to maximize product life cycle revenues from customers. To achieve this, they use value-analysis tools, shared metrics, and innovations in post-sale support and management. The best example identified by the research team is Saturn. Since its formation in the mid-1980s, the company has emphasized total life cycle ownership value by providing low prices and exceptionally high levels of after-sale service. By pooling retailer inventories, buying original equipment manufacturer (OEM) parts and spares through the GMC procurement network, and linking demand data with external parts suppliers to support production planning, Saturn enjoys:
• Retail inventory turns that are 50 percent above the industry average.
•The automobile industry's highest percentage of OEM customer loyalty.
• Off-the-shelf parts availability in excess of 92 percent, compared to less than 80 percent in the rest of the industry.

 10. The Rise of Outsourcing: Leading Supply Chain Companies Generally Excel in the Deployment of Partnering and Outsourcing Strategies

A)    Use Third Parties to Develop and Operate New Distribution Networks: Microsoft used an extensive network of contract manufacturers and logistics providers to successfully launch its Xbox game machine.

B)    Make Customers an Integral Part of the Supply Chain Process: DuPont’s retail customers take responsibility for mixing final colors and ensuring paint quality, thus reducing Dupont’s supply chain costs significantly.

C)    Have Suppliers Assume Primary Responsibility for Product Quality: Grainger, the leading industrial distributor of facilities maintenance products, uses a four-step approach to supplier quality management: 1) educate, 2) establish objectives, 3) continually improve processes, and 4) ensure tight and frequent communication.

11. Supply Chain Transformation Best Practices and Best Practitioners
•    Choose the right initiatives: Dell uses a staged approach to choosing supply chain initiatives. First, it tackles high-payoff areas, such as shared facilities and transport among suppliers. Then it uses   the savings and goodwill created to solve tougher challenges (e.g., new forecasting and inventory management tools). Plus, Dell constantly reviews priorities to help it adapt to business changes and keep implementation stages short.

•    Prioritize Supply Chain Investments: Nokia uses steering groups (including senior executives) to evaluate and finalize supply chain investments. Balancing supply and demand is always the top decision factor in choosing new projects; however, internal benchmarks and audits are used to compare investment priorities with high-tech competitors. Measurable impacts on end-to-end supply chain metrics are required to justify investments. Ensure that initiatives do not conflict with everyday supply chain operations Seven-Eleven Japan makes extensive use of vendor distribution systems to deliver multiple shipments per day to stores. This helps avoid (potentially conflicting) in-house distribution systems, while supporting highly varied product selection. Seven-Eleven Japan focuses in-house delivery operations on strict performance metrics, and it outsource activities that might adversely affect costs or service.


•    Develop a Cross-Supply-Chain-Optimization Mentality: Wal-Mart focuses on how to take costs out of the entire supply chain—from producer to consumer. Key objectives are lowering prices to the consumer and achieving higher sales and inventory velocity.

12. Pitfalls That Can Undermine Supply Chain Transformation: Top-management commitment wanes Supply chain transformations are often expensive, complex and time-consuming; there is always a chance that strategies and/or executive priorities will change. To mitigate this risk, Nokia places top executives on its supply chain project steering committees. At Dell, supply chain executives meet regularly with top officers for strategy and project reviews. Technology solutions fail to meet standards. This is a common problem, as evidenced by supply chain problems at Kmart, Nike and others. TSMC addresses it by using a small-project, staged approach: making sure that one system works well before starting on another. Intel’s method is to install the same technology in all plants, thus reducing errors and minimizing training barriers.

 Change Requirements Exceed Management/Culture Limits: The level of strategic change often conflicts with daily operational requirements, thus intensifying organizational stress. Seven-Eleven Japan’s solution is to use suppliers to design and operate “experimental” store deliveries for new products. Group one partnered with Coca-Cola to distribute Evian water in North America, thus avoiding the time, cost and trauma of making and managing significant supply chain investments.

 Collaborative Partners Do Not Deliver: Ensuring that everyone does their part is a major challenge. To minimize the problem, Wal-Mart holds frequent meetings with suppliers—clearly detailing requirements and how performance will be measured. The manufacturing group at smart (a subsidiary of DaimlerChrysler AG) co-locates suppliers near or within final assembly operations, setting up joint management committees to oversee compliance.

13. What to Look For:
Metrics and Success Factors Associated with Supply Chain Transformation: Successful benchmarking and metrics development often require that an actual program be put in place to capture and analyze supply chain information. In the case of supply chain transformation, there is a need for data that span the enterprise, so metrics management ideally will be led by a corporate-level organization that can see the “big picture.” Efforts undertaken at the departmental level (one business unit leading the charge) are seldom effective, unless that department's energy and enthusiasm can be amplified to produce a coordinated, enterprise wide program.

Supply chain executives involved in the research effort consistently cited the five metrics below as key to assessing the value of their supply chain transformations. Each of the five is conceptually simple. But it is much more difficult to understand exactly what the measurement parameters entail. That is why a formal program with executive-level involvement is so important.

•Efficiency/cost savings goals met: Did documented goals hit targets at the time specified, and did the CFO accept the results?
•Enhanced customer service: Do surveys (both formal and informal) confirm that customers find it easier and less expensive to do business with the company?
•Top-management involvement: Do senior executives understand how supply chain initiatives will improve the business, and do they agree on the impacts?
•Technology works as promised: Did software packages, and the integration projects supporting the initiatives, meet their objectives and timelines?
•Change goes smoothly: Did the company anticipate problems and deal with them quickly and without crises?     Did contingency plans work, if needed?

14. Supply Chain Transformations Become Casualties when Leaders Lose Faith in the Strategy or Process: Exhibit unwavering leadership: Supply chain transformations become casualties when leaders lose faith in the strategy or process. Texas Instruments had multiple, senior-level champions behind a global project to reengineer planning and forecasting. This helped TI overcome obstacles and stay focused.

The third area is predictive: broadly projecting the influence of supply chain transformation on the overall business landscape.
The following forecasts hone in on supply chain transformation:
1.  The best will get better: Supply chain leaders will remain dominant, as long as they continuously raise the bar for performance, innovation and transformation.
•   World-class supply chains will be “productized” and reap financial rewards. The Dell/EMC go-to-market partnership combines EMC's storage products and brand leadership with Dell's business model, enabling EMC to share in Dell's supply chain efficiencies and sourcing leverage.
•   Leaders will focus on the total product life cycle and overall consumer experience as the defining factors of their operating models. Recently named number one in both sales and customer satisfaction by J.D. Power and Associates, Saturn aggressively sells overall ownership experience rather than just an automobile.
•   Leaders will be early adopters of the most innovative supply chain technology, thereby realizing enhanced performance and efficiency gains much earlier than competitors. Tesco and Gillette are piloting a supply chain productivity tool (RFID) to monitor and track razor and blade product flows from plant to consumer.

2. Competition among supply chains will accelerate, with a new generation of supply chain transformers poised to challenge leader supremacy. Examples include apparel makers such as Benetton, Gap, H&M and Mango—all of which have emulated Zara by introducing profitable supply chain innovations of their own.
•   Third-party providers now offer fast-track approaches and best-of-breed capabilities to transformers seeking world-class supply chains. Li & Fung, through its worldwide supply base of 2,700 partners, can offer companies apparel sourcing, manufacturing, logistics, design collaboration and information systems. This helps client’s custom-design highly competitive supply chains.
•   Transformers focus on adopting innovations and technologies with immediate, positive impact. Cisco Systems is becoming more of a real-time enterprise by closing its books on a daily basis, thereby enabling rapid financial analysis of changes in supply chain operations.
•   Transformers are able to promote supply chain change in the organization through value-enhancing innovations. Zara routinely includes store managers and employees in product-design and supply-chain-efficiency decisions, thus enhancing buy-in on proposed changes.

3. Change-averse companies with inflexible operating models will fall further behind: Companies that fail to upgrade substandard supply chains will suffer lower market valuations.
•   Savvy investors know that inefficient supply chain operating models can significantly reduce overall profit performance. Despite numerous public announcements and major investments in logistics and technology, Kmart still lags industry leaders in supply chain inventory and cost performance, thus depressing returns to investors.

•   Companies with older, more-rigid operating models may share numerous, problematic supply chain behaviors:

-   Too many assets: Significant ownership of manufacturing, logistics and inventories when third parties could provide the same capabilities less expensively.

-   Poor collaboration skills: Inability to work closely with suppliers and/or customers to collectively improve supply chain performance and efficiency.

-   Ineffective information systems: Technology geared to managing what happened in the past, rather than what should happen in the future.

•   Such companies also tend to be trapped by financial reporting systems that inhibit innovation.

-   Inability to write off obsolete inventory or assets keeps stock prices artificially high.

-   Cost-only management focus fails to consider customer service implications.

-   No credit is given to the supply chain for revenue-enhancing innovations.

Companies that can quickly adopt strategic supply chain approaches will pull further ahead of those that cannot.

Lastly, several broad conclusions about the supply chain's role in tomorrow's success stories can be drawn from the insights of interviewees and survey respondents. Based on those contributions and the statistical analyses, five broad predictions come to light:

1.  The front end of the supply chain will become as important as the back end in maximizing total economic yield. Because demand now manifests itself in many more ways—via the Web, through online marketplaces or in conjunction with partnerships—smart companies will increase their emphasis on the supply chain's ability to enhance sales, marketing and service-focused relationships.

2. As companies migrate from internal-only to extended supply chains, collaboration will become the most strategic capability. Supply chains are fast becoming too complex for any one entity to manage effectively. Thus, tomorrow's winners will be the companies that conduct the orchestra, not those that play all the instruments.

3. Assets and functions not core to value delivery will be divested to specialists that can make more money on them. In their quest for new and advantageous business models, more companies will seek shared-profit arrangements with third parties. This approach—converting supply chain costs from fixed to variable—reduces expenses and makes it possible to serve customers more flexibly.

4. The greatest margin potential will occur after product ships, as service and support become as important as the product itself. Tomorrow's supply chain winners often will be those that bundle great products with strong service offerings, thus maximizing long-term customer profitability and catering to customers' increased emphasis on total cost of ownership.

5. The ability to integrate new and innovative capabilities with corporate business models will drive higher levels of value creation. In the near future, a company's ability to adapt and change itself will become even more critical. For example, rapid and “virtual” partnering will be key to new supply chain management strategies, as the best integrators work together to attain the biggest prizes.

Across all of the above predictions and observations, the common denominators are flexibility and innovation. As supply chains contribute more directly to revenue and profit growth, companies that can quickly adopt strategic supply chain approaches will pull further ahead of those that cannot.


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